Tim Harford is right that taxes are about more than raising revenue. They shape behaviour. When it comes to housing, Britain has designed a tax system that encourages precisely the wrong behaviour.
In a recent Financial Times column, Tim Harford examines new research comparing behavioural “nudges” with more traditional policies such as taxes. His conclusion is an important one. Nudges can be effective, but when governments want to change behaviour at scale, getting the underlying financial incentives right can have a much greater impact. As Harford puts it, politicians shouldn’t become so preoccupied with the icing that they forget to bake the cake.
Britain’s housing market is a striking example. Successive governments have worried about older people remaining in homes larger than they need, younger families struggling to find suitable properties and workers finding it difficult to move to where the jobs are. Yet our tax system actively discourages people from moving.
We tax people for moving
Stamp Duty is effectively a tax on mobility. An older couple wanting to downsize, a growing family needing another bedroom or someone moving across the country for a new job can all face a substantial tax bill simply for changing homes.
At the same time, Council Tax is based on property valuations from 1991 and bears only a loose relationship to what homes are worth today. People living in modest homes in some parts of England can pay a far higher proportion of their property’s value than owners of multimillion-pound homes elsewhere.
Put the two taxes together and we have created a peculiar set of incentives. We tax people every year through an outdated and highly regressive Council Tax system — and then impose another substantial tax if they decide to move. Then we wonder why the housing market doesn’t work properly.
Change the incentives
Fairer Share proposes replacing both Council Tax and residential Stamp Duty with a simple Proportional Property Tax based on current property values. The fairness argument for doing so is compelling. But there is an equally important economic argument.
PPT would change the incentives within the housing market. Most importantly, Stamp Duty would disappear. People would no longer face a potentially five-figure tax bill simply because they wanted to move home.
Older homeowners would face one fewer barrier to downsizing. Growing families could trade up more easily. People could move more readily for work. And homes could move towards the people who value and need them most.
Every additional transaction can also unlock another transaction further down the housing chain. This isn’t merely property-tax reform. It is housing-market reform.
The icing and the cake
Governments can devise schemes to encourage downsizing. They can build more retirement housing, provide better information or introduce targeted incentives. Many of these policies have merit.
But if the tax system continues to impose a large financial penalty on moving, government is simultaneously pressing the accelerator and the brake.
To borrow Harford’s analogy, those interventions are the icing. Getting the underlying tax incentives right is the cake.
Britain doesn’t simply need to build more homes. We also need to make better use of the millions of homes we already have. Tax reform cannot solve the housing crisis on its own. We need more building, better planning and the right types of homes in the places people want to live.
But alongside increasing supply, government should remove artificial barriers preventing the existing housing stock from being used more efficiently. Stamp Duty is one of the biggest.
Reform without instability
Politicians understandably worry about changing property taxation. Homes are people’s largest assets and sudden changes risk disrupting an already fragile housing market.
But that is an argument for careful transition, not for preserving a broken system indefinitely. Fairer Share proposes limiting annual increases for owner-occupied primary residences to £1,200, alongside a deferral scheme protecting those who are asset-rich but cash-poor. Reform can therefore be gradual and predictable.
And abolishing Stamp Duty is central to the proposition. This isn’t about simply replacing one property tax with another. It is about designing a system that is both fairer and less economically damaging.
That is why the sensible next step for the Government is an independent review of Council Tax and Stamp Duty, examining not only who pays what, but how these taxes affect mobility, downsizing, employment and the efficient use of Britain’s housing stock.
Too often the tax debate becomes an argument about whether taxes should be higher or lower. There is a better question: are we taxing the right things in the right way?
Britain’s property-tax system fails that test. Council Tax is based on values that are 35 years out of date. Stamp Duty penalises people for moving. The Government has an opportunity to change that. Stop taxing people for moving. Tax property fairly instead.